Looking at the FTSE 100 index of leading shares today compared to five years ago, it has grown… by almost nothing. Up just 0.1% in that period, in real terms the index has lost value given current inflation rates.
So does just parking my money in the lead index at the moment mean it is dead money that is unlikely to appreciate in value? Not necessarily.
FTSE 100 investing
Past performance is not an indicator of what will happen next. Although the FTSE 100 has barely moved in five years, and is up only 3% in the past 12 months, that does not mean the same will happen in the next five years. So money invested in the index today may not turn out to be dead money in future. Time will tell. The FTSE 100 could go into a growth spurt — but it could also drop.
One benefit I see to investing in the index, for example through a tracker fund, is diversification. Even with a small sum of money, I can get exposure to a large number of companies. That could help me reduce my risk compared to putting all my money into a small number of companies.
Choosing individual shares
But I think the principle of diversification also helps to explain why the FTSE 100 has had such lacklustre returns in the past few years. Having a position in each of 100 shares means that, as an investor, I would have to take the bad with the good.
That is why I currently use my Stocks and Shares ISA to own individual shares rather than an index tracker. That way, I hope to benefit from the strong performance of some top level shares while missing out on the poor performance of others.
How to find shares to buy
But how can I filter out shares that will perform well from those that will do badly? The short answer is that I cannot, as nobody knows what will happen next. What I can do is look for certain characteristics that over the long term are often associated with business success.
For example, if a company has an enduring competitive advantage that could help it keep making profits. That might be an infrastructure network, like the electricity distribution assets of National Grid. It could own a strong brand, like Guinness-maker Diageo. It may be proprietary technology, like Rolls-Royce.
I also consider a company’s balance sheet. If it has the ability to generate profits but they then get swallowed up servicing debt, the company may not be an attractive investment for me.
Why I own FTSE 100 shares
Although I do not own shares in a FTSE 100 tracker, I own stakes in a number of businesses that are included in the index. They are large companies that have already proven their business model. I try to find them by using the approach I described above.
So although the FTSE 100 may not have done well lately, that does not mean some of the shares in it might not still turn out to be good investments for my portfolio. I just need to find them!